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2 Important Reasons Why the Fate of the Euro Experiment is Seriously in Doubt

Last week, I wrote about the massive amount of risk that continues to emanate out of Europe, as its economies continue to exhibit protracted weakness coupled with electorates becoming increasingly disillusioned with the politics of austerity (http://onforb.es/Jm4jtr). I discussed wide-spread European recessions, the resignation of the Dutch government and the rising interest rates in the Spanish debt auctions. This past weekend, we gained more clarity on the political fragmentation in Europe that enhances my belief that the mid and long-term fate of the Euro is less than an even-money bet. While the results of this weekend’s elections in France and Greece were not wholly unexpected, they do usher in the next phase of the European Debt Crisis, and provide a number of reasons to believe that Europe is no closer to resolving its long-standing issues.

French Elections. Francois Hollande’s defeat of Nicolas Sarkozy probably puts an end to the Franco-German alliance affectionately known as “Merkozy” (reflecting the similar attitudes of German Chancellor Angela Merkel and Sarkozy towards resolving the crisis). The German-led approach to solving the crisis, which advocates fiscal belt-tightening and broad austerity as a pre-condition to German support, has now been rejected by the second strongest Eurozone nation in favor of more socialist “growth-oriented” policies that seek to reverse much of the fiscal compact “progress” achieved in recent months. Chancellor Merkel has already made it clear that a renegotiation of the fiscal compact, the very platform that helped Hollande claim victory, is off the table. Germany’s own citizens likely will become increasingly wary of funding a project that supports the more socialist visions of its French counterparts. The relationship between Germany and France, with their now potentially competing visions of how to reverse the crisis, austerity vs. spending, will greatly impact the future of the Euro.

Greek Elections. Perhaps even more important, at least in the short-term, is Greece re-emerging as the primary risk-factor within the widening Euro-crisis, by there resounding rejection of the Euro-centric, pro-bailout incumbents in favor of anti-bailout parties. The two mainstay political parties in Greece, the New Democracy and PASOK, were able to garner only one-third of the vote, leaving neither with a majority position in parliament. Voters came out heavily in support of parties that are much further to both the left and the right in a clear rebuke of the status quo of austerity in the name of the broader European vision. While it remains to be seen whether or not a coalition will be formed by these typically competing parties, they might do so under their shared goal of renegotiating the terms of their recently agreed to bailouts. Clearly, the mere possibility of backtracking on the fiscal compact and the newly minted Greek bailout increases the volatility of the European Debt Crisis and introduces more roadblocks on the path towards fiscal union, which will not be well received in Brussels. It’s my view that the probability that Greece abandons the Euro increased significantly following this weekend’s elections. The economic impact of Greece itself is far less important than the possibility of a precedent of a nation opting out of the shared currency.

I’m continually surprised at the ability of Europe to push out their problems further than most have come to expect, but I have to believe the leash on this “experiment” just became significantly shorter following this weekend’s rejection of the German vision. Stay tuned.

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